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A Radial Basis Function Scheme for Option Pricing in Exponential Lévy Models

Author

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  • Raymond Brummelhuis
  • Ron T. L. Chan

Abstract

We use Radial Basis Function (RBF) interpolation to price options in exponential Lévy models by numerically solving the fundamental pricing PIDE (Partial integro-differential equations). Our RBF scheme can handle arbitrary singularities of the Lévy measure in 0 without introducing further approximations, making it simpler to implement than competing methods. In numerical experiments using processes from the CGMY-KoBoL class, the scheme is found to be second order convergent in the number of interpolation points, including for processes of unbounded variation.

Suggested Citation

  • Raymond Brummelhuis & Ron T. L. Chan, 2014. "A Radial Basis Function Scheme for Option Pricing in Exponential Lévy Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(3), pages 238-269, July.
    • Handle: RePEc:taf:apmtfi:v:21:y:2014:i:3:p:238-269
    DOI: 10.1080/1350486X.2013.850902
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    Cited by:

    1. Anna Maria Gambaro & Nicola Secomandi, 2021. "A Discussion of Non‐Gaussian Price Processes for Energy and Commodity Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 47-67, January.
    2. Ron Tat Lung Chan, 2016. "Adaptive Radial Basis Function Methods for Pricing Options Under Jump-Diffusion Models," Computational Economics, Springer;Society for Computational Economics, vol. 47(4), pages 623-643, April.
    3. Yusho Kagraoka, 2020. "The Fractional Step Method versus the Radial Basis Functions for Option Pricing with Correlated Stochastic Processes," IJFS, MDPI, vol. 8(4), pages 1-13, December.
    4. Chan, Tat Lung (Ron), 2019. "Efficient computation of european option prices and their sensitivities with the complex fourier series method," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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